UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002March 31, 2003
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________
to__________to
Commission file number 1-2301
BOSTON EDISON COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1278810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Boylston Street, Boston,Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-424-2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 14, 2002
Common Stock, $1 par value 100Class Outstanding May 6, 2003
Common Stock, $1 per value 75 shares
The Company meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q as a wholly-ownedwholly owned subsidiary and is
therefore filing this Form with the reduced disclosure format.
Boston Edison Company
Form 10-Q - Quarterly Period Ended March 31, 2003
Index
Part I. Financial Information Page No.
Item 1. Financial Statements -
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of
Retained Earnings 4
Condensed Consolidated Balance Sheets 5 - 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated
Financial Statements 8 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 20
Item 4. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Sarbanes-Oxley Act Section 302(a) Certification Statements 24 - 25
___________________________________
Important Information
Boston Edison Company files its Forms 10-K, 10-Q and 8-K reports
and other information with the Securities and Exchange Commission
(SEC). You may access materials Boston Edison has filed with the
SEC free of charge on the SEC's website at www.sec.gov. In
addition, certain of Boston Edison's SEC filings can be accessed
on NSTAR's website at www.nstaronline.com. Copies of Boston
Edison's filings may also be obtained by writing or calling
Boston Edison's Investor Relations Department using the address
or phone number on the cover of this Form 10-Q.
Part I - Financial Information
Item 1. Financial Statements
Boston Edison Company
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,March 31,
2003 2002 2001 2002 2001
Operating revenues $468,628 $622,439 $1,265,744 $1,565,356$ 374,060 $ 410,075
Operating expenses:
Purchased power 199,435 343,530 625,950 900,490189,829 232,557
Operations and maintenance 56,482 50,426 169,174 143,87053,439 53,730
Depreciation and amortization 43,182 42,576 128,865 126,44142,991 42,779
Demand side management and renewable
energy programs 12,344 13,707 34,367 40,764
Taxes - property12,011 11,221
Taxes:
Property and other 17,187 16,428 52,828 51,25718,232 18,168
Income taxes 47,550 53,042 76,099 92,93712,800 11,861
Total operating expenses 376,180 519,709 1,087,283 1,355,759329,302 370,316
Operating income 92,448 102,730 178,461 209,59744,758 39,759
Other income (deductions):
Other income, net 1,892 816 3,075 4,794666 525
Other deductions, net (33) (474) (257) (1,188)(338) (213)
Total other income, net 1,859 342 2,818 3,606328 312
Interest charges:
Long term debt 10,878 11,685 33,091 35,21314,976 11,113
Transition property securitization
certificates 9,229 10,337 28,359 31,5668,684 9,805
Short-term debt and other 3,016 (476) 7,512 5,382interest 2,457 2,451
Allowance for borrowed funds used during
construction (315) (776) (584) (1,951)(58) (171)
Total interest charges 22,808 20,770 68,378 70,21026,059 23,198
Net income $ 71,49919,027 $ 82,302 $ 112,901 $ 142,993
======== ======== ========== ==========16,873
========= =========
Per share data is not relevant because Boston Edison Company's common stock is
wholly-owned by NSTAR.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Statements of Retained Earnings
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,March 31,
2003 2002 2001 2002 2001
Balance at the beginning of the $412,372 $346,850period $475,993 $428,150 $352,832
period
Add:
Net income 71,499 82,302 112,901 142,99319,027 16,873
Subtotal 483,871 429,152 541,051 495,825495,020 445,023
Deduct:
Dividends declared:
Dividends to Parent 25,490 28,100 5,354 84,300 68,927
Preferred stock 490 1,490 1,470 4,470490
Subtotal 25,980 28,590 6,844 85,770 73,397
Provision for preferred stock
redemption and issuance costs - 60 - 180
Balance at the end of the period $455,281 $422,248 $455,281 $422,248
======== ========$469,040 $416,433
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
September 30,(Unaudited)
March 31, December 31,
2003 2002 2001
Assets
Utility plant in service, at original cost $2,682,251 $2,641,759$2,799,582 $2,782,854
Less: accumulated depreciation 846,296 875,158
1,835,955 1,766,601864,602 854,857
1,934,980 1,927,997
Construction work in progress 72,499 38,81844,007 41,944
Net utility plant 1,908,454 1,805,4191,978,987 1,969,941
Equity investments 13,211 13,61111,410 11,592
Current assets:
Cash and cash equivalents 17,171 13,5498,240 44,062
Restricted cash 3,616 3,6253,616
Accounts receivable customers, net 201,303 264,633183,843 177,681
Accrued unbilled revenues 40,594 29,08114,337 21,468
Materials and supplies, at average cost 18,109 15,46113,985 13,291
Deferred tax asset - 18,141
Other 295 24,17015,965 5,575
Total current assets 281,088 350,519239,986 283,834
Deferred debits:
Regulatory assets - other 685,182 768,776
Regulatory assets - power contracts 265,723 -
Prepaid pension cost 238,315 218,7131,233,009 1,265,062
Other 23,571 27,763177,925 178,429
Total assets $3,415,544 $3,184,801
========== ==========$3,641,317 $3,708,858
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
September 30,(Unaudited)
March 31, December 31,
2003 2002 2001
Capitalization and Liabilities
Common equity:
Common stock, par value $1 per share
(100(75 shares issued and outstanding) $ - $ -
Premium on common stock 528,795 528,795278,795 278,795
Retained earnings 455,281 428,150469,040 475,993
Total common equity 984,076 956,945747,835 754,788
Cumulative non-mandatory redeemable preferred
stock 43,000 43,000
Long-term debt 559,705 551,803840,187 840,194
Transition property securitization certificates411,081 445,890 513,904
Total long-term debt 1,005,595 1,065,7071,251,268 1,286,084
Total capitalization 2,032,671 2,065,6522,042,103 2,083,872
Current liabilities:
Transition property securitization certificates 59,122 40,97258,405 40,555
Long-term debt 151,238 667275 150,687
Notes payable 176,000 - 191,500
Accounts payable -
Affiliates 9,442 73,2433,301 32,450
Other 130,493 91,522122,498 117,600
Accrued interest 5,808 10,73817,752 13,899
Other 112,109 67,09848,565 46,971
Total current liabilities 468,212 475,740426,796 402,162
Deferred credits:
Accumulated deferred income taxes 544,296 559,516
Accumulated deferredand
unamortized investment tax credits 18,502 19,249614,672 611,469
Power contracts 285,135 22,697312,408 350,117
Other 66,728 41,947245,338 261,238
Total deferred credits 914,661 643,4091,127,418 1,222,824
Commitments and contingencies
Total capitalization and liabilities $3,641,317 $ 3,415,544 $ 3,184,801
=========== ===========3,708,858
========= ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Boston Edison Company
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
NineThree Months Ended September 30,March 31,
2003 2002 2001
Operating activities:
Net income $112,901 $142,993$ 19,027 $ 16,873
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 128,865 126,44142,991 42,779
Deferred income taxes and investment
tax credits 1,052 (61,696)22,286 20,100
Allowance for borrowed funds used during
construction (584) (1,951)
Change(58) (171)
Net changes in other current assets 73,053 (82,725)
Change in other current liabilities (1,021) 82,868
Prepaid pension (19,602) (29,867)
Regulatory assets 11,793 (67,496)
Other, net 52,942 (19,579)working capital (10,777) (5,907)
Deferred debits and credits (63,022) 7,183
Net cash provided by operating activities 359,399 88,98810,447 80,857
Investing activities:
Plant expenditures (excluding AFUDC) (159,515) (92,178)(29,093) (54,099)
Other investments 400 10,585182 93
Net cash used in investing activities (159,115) (81,593)(28,911) (54,006)
Financing activities:
Redemptions of long-term debt (150,419) -
Transition property securitization
certificates redemptions (49,864) (47,628)
Capital Contribution - Parent - 66,346
Redemptions of long term debt (61,028) (14,020)(16,959) (16,040)
Net change in notes payable - 64,000176,000 10,500
Dividends paid (85,770) (73,397)(25,980) (28,590)
Net cash used in financing activities (196,662) (4,699)(17,358) (34,130)
Net increasedecrease in cash and cash equivalents 3,622 2,696(35,822) (7,279)
Cash and cash equivalents at beginning of year 44,062 13,549 12,125
Cash and cash equivalents at end of period $ 17,1718,240 $ 14,821
========= =========6,270
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 66,01322,210 $ 74,267
========= =========25,572
======== ========
Income taxes $ 17,6253,681 $ 80,818
========= =========8,290
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
The accompanying Notes should be read in conjunction with Notes
to the Consolidated Financial Statements included in Boston
Edison's 20012002 Annual Report on Form 10-K.
A)NOTE A. Business Organization and Summary of Significant
Accounting Policies
1. The Company
Boston Edison Company ("Boston Edison" or "the Company") is a
regulated public utility incorporated in 1886 under Massachusetts
law and is a wholly owned subsidiary of NSTAR. Boston Edison's
wholly owned subsidiaries are Harbor Electric Energy Company
(HEEC) and BEC Funding LLC. NSTAR is an energy delivery company
serving approximately 1.31.4 million customers in Massachusetts,
including approximately 1.1 million electric customers in 81
communities and 246,000300,000 gas customers in 51 communities. NSTAR
is an exempt public utility holding company.Boston
Edison serves approximately 683,000 electric customers in the
city of Boston and 39 surrounding cities and towns. NSTAR's
retail utility subsidiaries are The Company,Boston Edison, Commonwealth
Electric Company (ComElectric), Cambridge Electric Light Company
(Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). NSTAR's
three retail electric companies operate under the brand name
"NSTAR Electric." Reference in this report to "NSTAR Electric"
shall mean each of Boston Edison, ComElectric and Cambridge
Electric. B)NSTAR has a service company that provides management
and support services to substantially all NSTAR subsidiaries -
NSTAR Electric & Gas Corporation (NSTAR Electric & Gas).
2. Basis of Presentation
The financial information presented as of September 30, 2002March 31, 2003 and for
the periods ended September 30,March 31, 2003 and 2002 and 2001 have been prepared from
Boston Edison's books and records without audit by independent
accountants. Financial information as of December 31, 20012002 was
derived from the audited consolidated financial statements of
Boston Edison, but does not include all disclosures required by
accounting principles generally accepted accounting principlesin the United States of
America (GAAP). In the opinion of the Company's management, all adjustments
(which are of a normal recurring nature) necessary for a fair
presentation of the financial information for the periods
indicated have been included. Certain reclassifications have
been made to the prior year data to conform with the current
presentation.
Boston Edison is subject to the Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71). The application of SFAS 71 results in
differences in the timing of recognition of certain expenses from
that of other businesses and industries. The distribution
business remains subject to rate-regulation and continues to meet
the criteria for application of SFAS 71.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
these estimates.
The results of operations for the three or nine months ended September 30,March 31,
2003 and 2002 and 2001 are not indicative of the results that may be
expected for an entire year. Kilowatt-hour sales and revenues
are typically higher in the winter and summer than in the spring
and fall, as sales tend to vary with weather economic
and other variable conditions.
C) Critical Accounting Policies
The results of operations, as presented on the accompanying
financial statements, are based on the application of accounting
principles generally accepted in the United States. The
application of these principles often requires management to make
judgements, assumptions and estimates that may result in
different financial presentations.Note B. Asset Retirement Obligations
On January 1, 2003, Boston Edison believes that
the accounting principles presented herein are critical in terms
of understanding its financial statements. These principles
include the use of estimates for long-lived assets, equity method
investments and long-term obligations.
1. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make judgements, estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Certain of these accounting
principles require subjective and complex judgements used in the
preparation of financial statements. Accordingly, a different
financial presentation could result depending on the judgement,
estimates or assumptions that are used. Such estimates and
assumptions, include, but are not specifically limited to:
depreciation rates set by regulator, amortization terms, future
interest rates, future discount rates, mark-to-market valuations,
investment returns, impact of new accounting standards, future
costs associated with long-term contractual obligations, future
compliance costs associated with environmental regulations and
continuing creditworthiness of third parties. Actual results
could materially differ from these estimates.
2. Pension and Other Postretirement Benefits
Boston Edison is the sponsor of NSTAR's Pension Plan (the Plan).
As its sponsor, Boston Edison allocates the costs of the Plan
among itself and the other NSTAR subsidiary companies based on a
percentage of total direct labor charged to the Company.
The Company's pension and other postretirement costs are
dependent upon several factors and assumptions, such as the
discount rate, the long-term rate of return of plan assets and
health care trends.
The Company's plan assets have been affected by significant
declines in the equity markets in the past three years. These
conditions are expected to impact the funded status of the Plan
at year-end and pension and postretirement costs for 2003. Based
on current estimates, the Company anticipates recognizing pension
and other postretirement costs for 2003 of $25 million to $55
million above the 2002 level of $37 million. These costs would
result in approximately $20 million to $40 million of incremental
net pension and other postretirement expenses charged to expense
in 2003. Boston Edison will record approximately 60% of the
pension and other postretirement costs.
As a result of the negative investment performance, it is
probable that at December 31, 2002 the accumulated benefit
obligation will exceed Plan assets. Therefore, it is also
probable that the Company will be required to recognize an
additional minimum liability as prescribed by the Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 87, "Employers' Accounting for
Pensions" (SFAS 87) and SFAS No. 132, "Employers' Disclosures
about Pensions and Postretirement Benefits." The additional
minimum liability would result in the removal of Prepaid pension
cost from Boston Edison's Consolidated Balance Sheet.
The Company's prepaid pension balance was $238 million as of
September 30, 2002. The liability and Prepaid pension adjustment
would be recorded as a non-cash charge to Other Comprehensive
Income (OCI), and would not affect the results of operations for
2002. The charge to OCI would be reversed in future periods at
the time that the fair value of the trust assts exceeds the
accumulated benefit obligation. Assuming there is no significant
change in interest rates or equity market performance for the
remainder of the year, the Company anticipates that the after-tax
charge to OCI will be approximately $200 million to $300 million.
The ultimate impact of the Plan's investment performance on the
Company's financial position, results of operations and cash
flows will not be known until the Plan's assets and liabilities
are valued at December 31, 2002.
The Plan currently meets the minimum funding requirements of the
Employment Retirement Income Security Act of 1974. However,
management is currently evaluating the extent to which it may
make additional optional cash contributions to the Plan, the
timing of each contribution and the impact on the additional
minimum liability. Should management elect to increase the level
of its cash contributions to the Plan, such cash requirements
could be material to its cash flows. Management believes it has
adequate access to capital resources to support these
contributions. Pension and other postretirement costs and cash
contributions beyond 2003 are largely dependent on the financial
markets.
In addition, the Company anticipates filing a request with the
MDTE seeking an order to mitigate the non-cash charge to OCI and
the increases in expected pension and other postretirement
benefit costs and cash contributions. If approved, this request
could potentially allow the Company to record a regulatory asset
in lieu of a charge to OCI. The Company cannot determine whether
the request to the MDTE will be approved or whether the approval
would be sufficient to record a regulatory asset under SFAS 71.
D) Amortization of Merger Related Costs
The merger creating NSTAR was accounted for under the purchase
method of accounting and resulted in the recognition of an
acquisition premium (goodwill). An integral part of the merger
is the rate plan of the combined retail utility subsidiaries that
was approved by the Massachusetts Department of
Telecommunications and Energy (MDTE) in July 1999. Significant
elements of the rate plan include a four-year distribution rate
freeze through August 2003, recovery of the acquisition premium
(goodwill) of approximately $490 million over 40 years resulting
in annual amortization of approximately $12.2 million, and
recovery of filed costs to achieve (CTA) of $111 million over 10
years. CTA are the costs incurred to execute the merger
including the employee costs for a voluntary severance program,
costs of financial advisers, legal costs, and other transaction
and systems integration costs. Boston Edison expects to be
required by the MDTE to reconcile the actual CTA costs incurred
with the original estimate. This reconciliation will include a
final accounting of the deductibility for income tax purposes of
each component of CTA. The total actual consolidated NSTAR CTA
is approximately $143 million, with the majority of these costs
to be allocated to Boston Edison. This increase from the
original estimate is partially mitigated by the fact that the
portion of CTA that is not deductible for income tax purposes is
approximately $20 million lower than the original estimate. The
CTA and goodwill amounts were filed and approved as part of the
rate plan. The annual allocation of CTA amortization expense to
the Company is approximately $7.2 million.
As disclosed in Boston Edison's Form 10-K for the year ended
December 31, 2001, NSTAR expected that it would transfer $319
million of goodwill to its reporting unit, as a component of
Boston Edison's common equity, effective January 1, 2002.
However, upon further review and consideration of all the
transition provisions of the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), NSTAR
has determined it will continue to account for goodwill by the
acquired entities as it has done since the date of the merger.
The annual allocation of goodwill amortization expense to the
Company is approximately $8 million. For regulatory purposes,
Boston Edison has been allocated $319 million of goodwill and is
expensing this amount over 40 years. This amount is being
recovered from Boston Edison's customers and will continue to be
treated as an intercompany charge among the Company and its
affiliated companies, ComElectric, Cambridge Electric and NSTAR
Gas.
E) New Accounting Standards
On July 5, 2001, the FASB issuedadopted SFAS No. 143,
"Accounting for Asset Retirement Obligations" (SFAS 143). This
Statement establishes accounting and reporting standards for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS 143 requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is effectiveincurred.
When the liability is initially recorded, the entity capitalizes
the cost by increasing the carrying amount of the related long-
lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over
the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement.
Boston Edison has not identified any long-lived assets to which
there is a legal obligation to remove such assets. The
recognition of a potential asset retirement obligation would have
had no impact on its earnings. The Company, which follows SFAS
71, would have established regulatory assets or liabilities to
defer any differences between the liabilities established for
ratemaking purposes and those recorded as required under SFAS
143.
For Boston Edison, cost of removal (negative net salvage) is
recognized as a component of depreciation expense in accordance
with approved regulatory treatment. Since Boston Edison applies
SFAS 71, it will continue to include removal costs in
depreciation expense and will quantify the removal costs included
in accumulated depreciation as regulatory liabilities in footnote
disclosure. The Company estimates that at March 31, 2003, there
is approximately $145 million of removal costs, not yet incurred,
included in accumulated depreciation.
Note C. Derivative Instruments - Power Contracts
Boston Edison accounts for its power contracts in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). The accounting for derivative financial
instruments is subject to change based on the guidance received
from the Derivative Implementation Group (DIG) of FASB. The DIG
issued No. C15, "Scope Exceptions: Normal Purchases and Normal
Sales Exception for Option-Type Contracts and Forward Contracts
in Electricity," which specifically addressed the interpretation
of clearly and closely related contracts that qualify for the
normal purchases and sales exception under SFAS 133. The
conclusion reached by the DIG was that contracts with a pricing
mechanism that is subject to future adjustment based on a generic
index that is not specifically related to the contracted service
commodity generally would not qualify for the normal purchases
and sales exception.
Boston Edison has one purchased power contract that contains
components with a pricing mechanism that is based on a pricing
index, such as the GNP or CPI. Although these factors are only
applied to certain ancillary pricing components of this
agreement, as required by the interpretation of DIG Issue C15,
Boston Edison began recording this contract at fair value on its
Consolidated Balance Sheets during 2002. This action resulted in
the recognition of a liability for the fair value of the above-
market portion of this contract at March 31, 2003 and December
31, 2002 of approximately $258 million and $305 million,
respectively, and is a component of Deferred credits - Power
contracts on the accompanying Condensed Consolidated Balance
Sheets. The decline in above-market costs during the current
period was primarily due to an increase in wholesale energy
prices during the first quarter. Boston Edison has recorded a
corresponding regulatory asset to reflect the future recovery of
the above-market component of this contract through its
transition charge. Therefore, as a result of this regulatory
treatment, the recording of this contract on the Company's
accompanying Condensed Consolidated Balance Sheets does not
result in an earnings impact.
Note D. Other Utility Matters
1. Service Quality Index
On February 28, 2003, Boston Edison filed its 2002 Service
Quality Report with the Massachusetts Department of
Telecommunications and Energy (MDTE) that reflected significant
improvements in reliability and performance and indicated that no
penalty should be assessed for the 2002 period. These penalties
are monitored on a monthly basis to determine the Company's
contingent liability, and if the Company determines it is
probable that a liability has been incurred and is estimable, the
Company would then accrue an appropriate liability. Annually,
each NSTAR utility subsidiary makes a service quality performance
filing with the MDTE. Any settlement or rate order that would
result in a different liability (or credit) level from what has
been accrued would be adjusted in the period when such settlement
or rate order is issued.
Through March 31, 2003, Boston Edison's performance has met or
exceeded the applicable established benchmarks; however, these
results may not be indicative of the results that may be expected
for the remainder of the year, including the peak-demand period
anticipated during the summer period.
2. Regulatory Proceedings
In December 2002, NSTAR Electric filed proposed transition rate
adjustments for 2003, including a preliminary reconciliation of
transition, transmission, standard offer and default service
costs and revenues through 2002. The MDTE approved tariffs for
each retail electric subsidiary effective January 1, 2003. The
filings were updated in February 2003 to include final costs and
revenues for 2002.
On April 24, 2003, NSTAR Electric received approval from the MDTE
for a Standard Offer Service Fuel Adjustment of $0.902 per
kilowatt-hour to be effective May 1, 2003. The increase in rates
is in response to continuing high wholesale costs. In the past,
the MDTE has allowed companies to adjust to rapidly changing
market costs of oil and natural gas used to generate electricity.
In accordance with that order, Boston Edison implemented the
adjustment in January 2001 as energy prices soared on world
markets and reduced the charge back to zero in April 2002 when
market energy costs dropped. The Boston Edison Standard Offer
Service Fuel Adjustment remained at zero for the past year. The
MDTE has ruled that these fuel index adjustments are excluded
from the 15% rate reduction requirement under the 1997
Massachusetts Restructuring Act (Restructuring Act).
Note E. Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the
recognition of deferred tax assets and liabilities for the future
tax effects of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. In accordance with
SFAS 109, net regulatory assets include $60 million and $60.3
million of deferred tax assets and corresponding amounts in
accumulated deferred income taxes that were recorded as of March
31, 2003 and December 31, 2002, respectively. The regulatory
assets represent the additional future revenues to be collected
from customers for deferred income taxes.
The following table reconciles the statutory federal income tax
rate to the annual estimated effective income tax rate for 2003
and the actual effective income tax rate for the year ended
December 31, 2002:
2003 2002
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income
tax benefit 4.4 4.4
Investment tax credit amortization (0.5) (0.5)
Other 1.9 1.9
Effective tax rate 40.8% 40.8%
==== ====
Note F. Commitments and Contingencies
1. Environmental Matters
As of March 31, 2003, Boston Edison is involved in 10 state-
regulated properties ("Massachusetts Contingency Plan, or "MCP"
sites") where oil or other hazardous materials were previously
spilled or released. Boston Edison is required to clean up or
otherwise remediate these properties in accordance with specific
state regulations. There are uncertainties associated with the
remediation costs due to the final selection of the specific
cleanup technology and the particular characteristics of the
different sites. Estimates of approximately $0.4 million are
included as liabilities in the accompanying Condensed
Consolidated Balance Sheets at March 31, 2003 and December 31,
2002.
In addition to the MCP sites, Boston Edison also faces possible
liability as a result of involvement in 8 multi-party disposal
sites or third party claims associated with contamination
remediation. Boston Edison generally expects to have only a
small percentage of the total potential liability for these
sites. Estimates of approximately $3.3 million are included as
liabilities in the accompanying Condensed Consolidated Balance
Sheets at March 31, 2003 and December 31, 2002.
Accordingly, the MCP and multi-party disposal site amounts have
not been reduced by any potential rate recovery treatment of
these costs or any potential recovery from Boston Edison's
insurance carriers. Prospectively, should Boston Edison be
allowed to collect these specific costs from customers, it would
record an offsetting regulatory asset and record a credit to
operating expenses equal to previously expensed costs. Based on
its assessments of the specific site circumstances, management
does not believe that it is probable that any such additional
costs will have a material impact on Boston Edison's consolidated
financial position.
Estimates related to environmental remediation costs are reviewed
and adjusted periodically as further investigation and assignment
of responsibility occurs and as either additional sites are
identified or Boston Edison's responsibilities for such sites
evolve or are resolved. Boston Edison's ultimate liability for
future environmental remediation costs may vary from these
estimates. Boston Edison's management does not believe that its
current assessment of its environmental responsibilities,
existing legal requirements and regulatory policies, will have a
material adverse effect on Boston Edison's consolidated financial
position or results of operations for a reporting period.
2. Legal Proceedings
In the normal course of its business, Boston Edison and its
subsidiaries are involved in certain legal matters, including
civil litigation. Management is unable to fully determine a
range of reasonably possible court-ordered damages, settlement
amounts, and related litigation costs ("legal liabilities") that
would be in excess of amounts accrued. Based on the information
currently available, Boston Edison does not believe that it is
probable that any such additional legal liability will have a
material impact on its consolidated financial position. However,
it is reasonably possible that additional legal liabilities that
may result from changes in estimates could have a material impact
on its results of operations for a reporting period.
Note G. Subsequent Event
Pension and Postretirement Benefit Obligations Other Than
Pensions (PBOP) Adjustment Mechanism Tariff Filing
On April 16, 2003, Boston Edison submitted a request to the MDTE
for approval to establish a reconciliation adjustment mechanism
to provide for the recovery of costs associated with the
Company's obligations to provide its employees pension benefits
and PBOP.
The Company's proposal is intended to give effect to the
accounting treatment previously approved by the MDTE, through a
reconciling ratemaking mechanism that will provide rate stability
and ensure that customers pay no more or no less than the amounts
needed to extend pension and PBOP benefits to the Company's
employees. In addition, this mechanism will ensure that the
financial integrity of the Company is not impaired by financial
reporting requirements and cash flow issues that arise from the
extreme volatility of pension and PBOP funding obligations.
The Company's proposed reconciliation adjustment mechanism does
not result in any immediate change (increase or decrease) in
prices paid by customers and allows the Company to recover the
same types of pension and PBOP costs that have always been
recovered in rates. In addition, the proposed reconciliation
adjustment mechanism removes the extreme volatility in rates that
may be the result of requirements of existing financial
accounting standards, provides for more timely recovery of costs
from or refunds of gains to customers, provides for an annual
filing, true-up and review by the MDTE, carves out pension and
PBOP costs from regular distribution rates so that the MDTE may
review them annually, and ensures that benefit trust funds are
sufficient to provide the Company's employees with the benefits
to which they are entitled.
The MDTE has historically permitted the recovery of prudently
incurred expenditures relating to pension and PBOP benefits for
the Company's employees. The Company consistently contributes to
trust funds that hold and invest the contributions until benefits
are paid.
The Company is requesting that the MDTE approve the
reconciliation adjustment mechanism by August 1, 2003.
The Company cannot determine the timing and ultimate outcome of
this request.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
The accompanying MD&A should be read in conjunction with the MD&A
in Boston Edison's 2002 Annual Report on Form 10-K.
Overview
Boston Edison Company ("Boston Edison" or "the Company") is a
regulated public utility incorporated in 1886 under Massachusetts
law and is a wholly owned subsidiary of NSTAR. Boston Edison's
wholly owned subsidiaries are Harbor Electric Energy Company
(HEEC) and BEC Funding LLC. NSTAR is an energy delivery company
serving approximately 1.4 million customers in Massachusetts,
including approximately 1.1 million electric customers in 81
communities and 300,000 gas customers in 51 communities. Boston
Edison serves approximately 683,000 electric customers in the
city of Boston and 39 surrounding communities. NSTAR's retail
utility subsidiaries are Boston Edison, Commonwealth Electric
Company (ComElectric), Cambridge Electric Light Company
(Cambridge Electric) and NSTAR Gas Company (NSTAR Gas). Its
wholesale electric subsidiary is Canal Electric Company (Canal).
NSTAR's three retail electric companies operate under the brand
name "NSTAR Electric." Reference in this report to "NSTAR
Electric" shall mean each of Boston Edison, ComElectric and
Cambridge Electric. NSTAR has a service company that provides
management and support services to substantially all NSTAR
subsidiaries - NSTAR Electric & Gas Corporation (NSTAR Electric &
Gas).
Cautionary Statement
This MD&A contains certain forward-looking statements such as
forecasts and projections of expected future performance or
statements of management's plans and objectives. These
statements are based on the current expectations, estimates or
projections of management and are not guarantees of future
performance. Some or all of these forward-looking statements may
not turn out to be what the Company expected. Actual results
could potentially differ materially from these statements.
Therefore, no assurance can be given that the outcomes stated in
such forward-looking statements and estimates will be achieved.
The effects of cost control procedures, changes in weather,
economic conditions, tax rates, interest rates, technology, and
prices and availability of operating supplies could materially
affect actual results quarter to quarter and projected operating
results.
Boston Edison's forward-looking information is based in large
measure on prevailing governmental policies and regulatory
actions, including those of the Massachusetts Department of
telecommunications and Energy (MDTE) and the Federal Energy
Regulatory Commission (FERC), with respect to allowed rates of
return, rate structure, continued recovery of regulatory assets,
financings, purchased power and cost of gas recovery, acquisition
and disposition of assets, operation and construction of
facilities, changes in tax laws and policies and changes in and
compliance with environmental and safety laws and policies. The
impacts of various environmental, legal, and regulatory matters
could differ from current expectations.
You are advised to consider all further disclosures Boston Edison
makes in its filings to the Securities and Exchange Commission
(SEC). This report also describes changes to Boston Edison's
material contingencies and critical accounting policies and
estimates in this MD&A and in the accompanying Notes to Condensed
Consolidated Financial Statements, and Boston Edison encourages
you to review these disclosures. You are also advised to
consider the "Cautionary Statements" Boston Edison made in its
2002 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
For a complete discussion of critical accounting policies, refer
to "Critical Accounting Policies and Estimates" in Item 7 of
Boston Edison's 2002 Form 10-K. There have been no substantive
changes to those policies and estimates.
Asset Retirement Obligations
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations" (SFAS 143). This Statement
establishes accounting and reporting standards for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. SFAS 143 requires entities to
record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes the cost
by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement.
Management is currently assessing the impact of SFAS 143 in light
of its regulatory and accounting requirements. ManagementThe Company has not identified several minorany long-lived assets including lease
arrangements, and has determined that itto which
there is legally responsiblea legal obligation to remove such property and comply with the requirementassets. The
recognition of this
standard. However, based on Boston Edison's assessment of itsa potential liability and rate regulatory treatment for the
identified assets, the adoption of SFAS 143 is not expected toasset retirement obligation would have
an effect on its results of operations, cash flows, or
financial position.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets" (SFAS 144), was effective January 1, 2002, and
addresses accounting and reporting for the impairment or disposal
of long-lived assets. SFAS 144, among other things, expands the
reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The
implementation of SFAS 144 had no effect on Boston Edison's
results of operations or financial position.
The FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146) that requires
entities to record a liability for costs related to exit or
disposal activities when the costs are incurred. Previous
accounting guidance required the liability to be recorded at the
date of commitment to an exit or disposal plan. Boston Edison is
required to comply with SFAS 146 beginning January 1, 2003.
Boston Edison anticipates that the implementation of this
standard will not have an adverse impact on its financial
positionearnings. The Company, which follows SFAS
71, would have established regulatory assets or results of operations.
As of January 1, 2001,liabilities to
defer any differences between the liabilities established for
ratemaking purposes and those recorded as required under SFAS
143.
For Boston Edison, adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities",cost of removal (negative net salvage) is
recognized as amended by SFAS Nos. 137 and 138, (collectively, SFAS 133).
SFAS 133 established accounting and reporting standards requiring
every derivative instrument (including certain derivative
instruments embedded in such contracts as fixed-price fuel supply
and power contracts) be recorded on the Consolidated Balance
Sheets as either an asset or liability measured at its fair
value. Previously, all of Boston Edison's commodity purchased
power contracts were exempt from this accounting treatment under
the normal purchase and sales exception of SFAS 133. As a
result, these contracts were not marked to market and have not
been reflected on the accompanying Condensed Consolidated Balance
Sheets.
Refer to Note F "Derivative Instruments" for further discussion.
F) Derivative Instruments
Boston Edison adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), effective January
1, 2001. The accounting for derivative financial instruments is
subject to change based on the guidance received from the
Derivative Implementation Group (DIG) of FASB. The DIG issued
C15, on October 10, 2001, which specifically addressed the
interpretation of clearly and closely related contracts that
qualify for the normal purchase and sales exception under SFAS
133. The conclusion reached by the DIG was that contracts with a
pricing mechanism that is subject to future adjustment based on a
generic index that is not specifically related to the contracted
service commodity, generally would not qualify for the normal
purchase and sales exception.
On April 1, 2002, the effective date of DIG C15, Boston Edison
adopted the interpretation of this guidance and began marking to
market certain of its long-term purchased power contracts that
previously qualified for the normal purchase and sale exception.
Boston Edison has one purchased power contract that contains
components with pricing mechanisms that are based on a generic
index, such as the GNP or CPI and are applied to in significant
factors of these agreements. Therefore, as required by the
interpretation of C15, Boston Edison has recorded this contract
at fair value on its accompanying Condensed Consolidated Balance
Sheets beginning in the second quarter of 2002. This action
resulted in the recognition of a liability for the fair value of
the above-market portion of this contract as of September 30,
2002 of approximately $266 million and is a component of Power
contracts on the accompanying Condensed Consolidated Balance
Sheets.depreciation expense in accordance
with approved regulatory treatment. Since Boston Edison has recordedapplies
SFAS 71, it will continue to include removal costs in
depreciation expenses and will quantify the removal costs
included in accumulated depreciation as regulatory liabilities in
footnote disclosure. The Company estimates that at March 31,
2003, there is approximately $145 million of removal costs, note
yet incurred, included in accumulated depreciation.
Rate and Regulatory Proceedings
a. Pension and Postretirement Benefit Obligations Other Than
Pensions (PBOP)
On April 16, 2003, Boston Edison submitted a corresponding regulatory
assetrequest to reflect the futureMDTE
for approval to establish a reconciliation adjustment mechanism
to provide for the recovery of costs associated with the
above-market
componentCompany's obligations to provide its employees pension benefits
and PBOP.
The Company's proposal is intended to give effect to the
accounting treatment previously approved by the MDTE, through a
reconciling ratemaking mechanism that will provide rate stability
and ensure that customers pay no more or no less than the amounts
needed to extend pension and PBOP benefits to the Company's
employees. In addition, this mechanism will ensure that the
financial integrity of this contract through its transition charge.
Therefore, as a resultthe Company is not impaired by financial
reporting requirements and cash flow issues that arise from the
extreme volatility of this regulatory treatment, the
recording of this contract on its accompanying Condensed
Consolidated Balance Sheetspension and PBOP funding obligations.
The Company's proposed reconciliation adjustment mechanism does
not result in any immediate change (increase or decrease) in
prices paid by customers and allows the Company to recover the
same types of pension and PBOP costs that have always been
recovered in rates. In addition, the proposed reconciliation
adjustment mechanism removes the extreme volatility in rates that
may be the result of requirements of existing financial
accounting standards (SFAS Nos. 87 and 106), provides for more
timely recovery of costs from or refunds of gains to customers,
provides for an earnings
impact.annual filing, true-up and review by the MDTE,
carves out pension and PBOP costs from regular distribution rates
so that the MDTE may review them annually, and ensures that
benefit trust funds are sufficient to provide NSTAR employees
with the benefits to which they are entitled.
The MDTE has historically permitted the recovery of prudently
incurred expenditures relating to pension and PBOP benefits for
the Company's employees. The Company consistently contributes to
trust funds that hold and invest the contributions until benefits
are paid.
The Company is requesting that the MDTE approve the
reconciliation adjustment mechanism by August 1, 2003.
The Company cannot determine the timing and ultimate outcome of
this request.
This action does not preclude Boston Edison has other purchased power contractsfrom pursuing a
general base rate increase in which the fair value is significantly above-market. However, these
contracts have metfuture. Boston Edison's four-
year rate freeze expires in the criteria for normal purchase and sales
exception pursuant to SFAS 133 and C15 and have not been recorded
on the accompanying Condensed Consolidated Balance Sheets. The
above market portionthird quarter of this contract is currently being
recovered through the transition charge.
Boston Edison will continue to monitor any further guidance that
may result from FASB revisions and clarifications to SFAS 133.
Based on Boston Edison's assessment to date, the adoption of SFAS
133 has not had a material effect on its results of operations,
cash flows, or net assets.
G)year.
b. Service Quality Index
On October 29, 2001, and as subsequently updated, NSTAR ElectricFebruary 28, 2003, Boston Edison filed proposed service quality plans for each companyits 2002 Service
Quality Report with the MDTE which included guidelines that had been established by the
MDTE as a result of its generic investigation of service quality
issues. The service quality plans established performance
benchmarks effective January 1, 2002 for certain identified
measures of service quality relating to customer service and
billing performance, customer satisfaction, andreflected significant
improvements in reliability and safety performance. NSTAR Electric is required to report
annually concerning its performance as to each measure and is
subject to maximum penalties of up to two percent of transmission
and distribution revenuesindicated that no
penalty should performance fail to meet the
applicable benchmarks. NSTAR Electric also filed with the MDTE a
report concerning its performance on the identified service
quality measuresbe assessed for the two twelve-month periods ended August
31, 2000 and 2001. This report included a calculation of
penalties in accordance with MDTE guidelines as if such
guidelines were in effect during the2002 period. On March 22, 2002,
following hearings on the matter, the MDTE issued an order
imposing a service quality penalty of approximately $3.25 million
on NSTAR Electric of which $3.2 million related specifically to
Boston Edison that was refunded to customers as a credit to their
bills during the month of May 2002. As a result of the accrual
for this estimated penalty during 2001, this refund had no effect
on Boston Edison's consolidated financial position or results of
operations in 2002.
Through September 30, 2002 Boston Edison's performance has
resulted in a minimal penalty situation based on both actual
results through September 2002 and forecasted results for the
remaining three-month period. However, these results may not be
indicative of the results for the remainder of the year. Boston
Edison accounts for its service quality penalties pursuant to
SFAS No. 5, "Accounting for Contingencies." Accordingly, theseThese penalties
are monitored on a monthly basis to determine Boston
Edison'sthe Company's
contingent liability, and if Boston Edisonthe Company determines it is
probable that a liability has been incurred and is estimable, Boston Edisonthe
Company would then accrue an appropriate liability. Annually,
each NSTAR Electric company, including Boston Edison,utility subsidiary makes a service quality performance
filing with the MDTE. Any settlement or rate order that would
result in a different liability (or credit) level from what has
been accrued would be adjusted in the period an agreementwhen such settlement
or rate order is received from the MDTE.
H) Contingencies
1. Merger Rate Appeal
The 1999 MDTE order, which approved the rate plan associated with
the merger of BEC and COM/Energy, was appealed by certain parties
to the Massachusetts Supreme Judicial Court (SJC). In October
2001, the MDTE certified the record of the case to the SJC. The
appeals of the Massachusetts Attorney General (AG) and a separate
group that consists of The Energy Consortium (TEC) and Harvard
University (Harvard) are pending. On June 21, 2002, TEC and
Harvard filed their joint initial brief with the SJC and on June
24, 2002, the AG filed a brief in the consolidated proceeding.
TEC and Harvard allege that, in approving the rate plan and
merger proposal, the MDTE committed errors of law in the
following areas: (1) in adopting a public interest standard, the
MDTE applied the wrong standard of review, and failed to
investigate the propriety of rates and to determine that the
resulting rates of Boston Edison, Cambridge Electric, ComElectric
and NSTAR Gas were just and reasonable; (2) that in permitting
Cambridge Electric and ComElectric to adjust their rates by $49.8
million to reflect demand-side management costs, the MDTE failed
to determine whether such an adjustment was warranted in light of
other cost decreases; (3) that the MDTE's approval results in an
arbitrary and unjustified sharing of benefits and costs between
ratepayers and shareholders; and (4) that the MDTE's approval of
the rate plan guarantees shareholders recovery of future costs
without any future demonstration of customer savings. The AG's
brief includes similar arguments in each of these areas and adds
that, in allowing recovery of the acquisition premium, the MDTE
has improperly deviated from a cost basis in setting approved
rates and the ratemaking policies in other jurisdictions.
Responsive briefs from NSTAR and the MDTE were filed on August
30, 2002 and September 9, 2002, respectively. Reply briefs were
filed by TEC/Harvard and the AG on September 27, 2002 and October
3, 2002, respectively. On November 4, 2002, oral arguments
occurred before the SJC. Management is currently unable to
determine the outcome of this proceeding. Boston Edison intends
to vigorously defend its position relative to this appeal.
However, if an unfavorable outcome were to occur, there could be
a material adverse impact on business operations, the
consolidated financial position, cash flows and the results of
operations for the reporting period in which the unfavorable
outcome occurs.
2. Environmental Matters
Boston Edison is involved in approximately 14 state-regulated
properties ("Massachusetts Contingency Plan, or "MCP sites")
where oil or other hazardous materials were previously spilled or
released. Boston Edison is required to clean up or otherwise
remedy these properties in accordance with specific state
regulations. There are uncertainties associated with the
remediation costs due to the final selection of the specific
cleanup technology and the particular characteristics of the
different sites. In addition to the MCP sites, Boston Edison also
faces possible liability as a potentially responsible party (PRP)
in the cleanup of five multi-party hazardous waste sites in
Massachusetts and other states where it is alleged to have
generated, transported or disposed of hazardous waste at the
sites. Boston Edison generally expects to have only a small
percentage of the total potential liability for these sites.
Approximately $4.7 million and $4.8 million are included as
liabilities in the accompanying Condensed Consolidated Balance
Sheets at September 30, 2002 and Decemberissued.
Through March 31, 2001, respectively,
related to the non-recoverable portion of these cleanup
liabilities and is the gross amount of NSTAR's estimated
environmental clean-up obligations that is not certain to be
recoverable in rates. Accordingly, this amount has not been
reduced by any potential rate recovery treatment of these costs
or any potential recovery from the company's insurance carriers.
Prospectively, should NSTAR be allowed regulatory rate recovery
of these specific costs, it would record an offsetting regulatory
asset and record a credit to operating expenses equal to
previously expensed costs. Based on its assessments of the
specific site circumstances, management does not believe that it
is probable that any such additional costs will have a material
impact on2003, Boston Edison's consolidated financial position.
Estimates related to environmental remediation costs are reviewed
and adjusted periodically as further investigation and assignment
of responsibility occurs and as either additional sites are
identifiedperformance has met or
Boston Edison's responsibilities for such sites are
resolved. Boston Edison is unable to estimate its ultimate
liability for future environmental remediation costs. However, in
view of Boston Edison's current assessment of its environmental
responsibilities, existing legal requirements and regulatory
policies, management does not believe that these matters will
have a material adverse effect on Boston Edison's financial
position or results of operations for a reporting period.
3. Legal Proceedings
In the normal course of its business, Boston Edison and its
subsidiaries are also involved in certain legal matters,
including civil lawsuits. Management is unable to fully
determine a range of reasonably possible court-ordered damages,
settlement amounts, and related litigation costs ("legal
liabilities") that would be in excess of amounts accrued. Based
on the information currently available, the Company does not
believe that it is probable that any such additional legal
liability will have a material impact on its consolidated
financial position. However, it is reasonably possible that
additional legal liabilities costs that may result from changes
in estimates could have a material impact on its results of
operations for a reporting period.
I) Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the
recognition of deferred tax assets and liabilities for the future
tax effects of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. In accordance with
SFAS 109, net regulatory assets include $61.2 million and $62.1
million of deferred tax assets and corresponding amounts in
accumulated deferred income taxes that were recorded as of
September 30, 2002 and December 31, 2001, respectively. The
regulatory assets represent the additional future revenues to be
collected from customers for deferred income taxes.
The following table reconciles the statutory federal income tax
rate to the annual estimated effective income tax rate for 2002
and the actual effective income tax rate for the year ended
December 31, 2001:
2002 2001
Statutory tax rate 35.0% 35.0%
State income tax, net of federal income tax benefit 4.4 4.4
Investment tax credits (0.4) (0.4)
Other 2.1 1.8
Effective tax rate 41.1% 40.8%
==== ====
J) Subsequent Events
Long-Term Debt Issuance
On October 15, 2002, Boston Edison sold $400 million of 4.875% 10-
year debentures and $100 million of 3-year floating rate
debentures priced at LIBOR plus 50 basis points. The net
proceeds were used to repay consolidated outstanding short-term
debt balances. For financial reporting purposes, short-term debt
has been reclassified on the accompanying Condensed Consolidated
Balance Sheets as Long-term debt.
Item 2. Management's Discussion and Analysis of Results of
Operations
The accompanying Management's Discussion and Analysis (MD&A)
should be read in conjunction with the MD&A in Boston Edison's
2001 Annual Report on Form 10-K.
Overview
Boston Edison Company ("Boston Edison" or "the Company") is a
regulated public utility incorporated in 1886 under Massachusetts
law and is a wholly owned subsidiary of NSTAR. Boston Edison's
wholly owned subsidiaries are Harbor Electric Energy Company
(HEEC) and BEC Funding LLC.
NSTAR is an energy delivery company serving approximately 1.3
million customers in Massachusetts, including approximately 1.1
million electric customers in 81 communities and 246,000 gas
customers in 51 communities. NSTAR is an exempt public utility
holding company. NSTAR's retail utility subsidiaries are Boston
Edison Company (Boston Edison), Commonwealth Electric Company
(ComElectric), Cambridge Electric Light Company (Cambridge
Electric) and NSTAR Gas Company (NSTAR Gas). Its wholesale
electric subsidiary is Canal Electric Company (Canal). NSTAR's
three retail electric companies operate under the brand name
"NSTAR Electric." Reference in this report to "NSTAR Electric"
shall mean each of Boston Edison, ComElectric and Cambridge
Electric. NSTAR's non-utility operations include
telecommunications - NSTAR Communications, Inc. (NSTAR Com),
district heating and cooling operations (Advanced Energy Systems,
Inc. and NSTAR Steam Corporation) and a liquefied natural gas
service company (Hopkinton LNG Corp.).
Cautionary Statement
This Management's Discussion and Analysis contains certain
forward-looking statements such as forecasts and projections of
expected future performance or statements of management's plans
and objectives. These forward-looking statements may also be
contained in filings with the Securities and Exchange Commission
(SEC) and in press releases and oral statements. You can
identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning in
connection with any discussion of future operating or financial
performance. These statements are based on the current
expectations, estimates or projections of management and are not
guarantees of future performance. Some or all of these forward-
looking statements may not turn out to be what the Company
expected. Actual results could potentially differ materially
from these statements. Therefore, no assurance can be given that
the outcomes stated in such forward-looking statements and
estimates will be achieved.
The impact of continued cost control procedures on operating
results could differ from current expectations. Boston Edison's
revenues from its electric sales are weather-sensitive,
particularly sales to residential and commercial customers.
Accordingly, Boston Edison's sales in any given period reflect,
in addition to other factors, the impact of weather, with warmer
temperatures generally resulting in increased electric sales.
Boston Edison anticipates that these sensitivities to seasonal
and other weather conditions will continue to impact its sales
forecasts in future periods. The effects of changes in weather,
economic conditions, tax rates, interest rates, technology,
prices and availability of operating supplies could materially
affect the projected operating results.
Boston Edison's forward-looking information depends in large
measure on prevailing governmental policies and regulatory
actions, including those of the Massachusetts Department of
Telecommunications and Energy (MDTE) and the Federal Energy
Regulatory Commission (FERC), with respect to allowed rates of
return, rate structure, financings, purchased power recovery,
acquisition and disposition of assets, operation and construction
of facilities, changes in tax laws and policies and changes in
and compliance with environmental and safety laws and policies.
The impacts of various environmental, legal issues, and
regulatory matters could differ from current expectations. New
regulations or changes to existing regulations could impose
additional operating requirements or liabilities other than
expected. The effects of changes in specific hazardous waste
site conditions and the specific cleanup technology could affect
the estimated cleanup liabilities. The impacts of changes in
available information and circumstances regarding legal issues
could affect any estimated litigation costs.
Boston Edison undertakes no obligation to publicly update forward-
looking statements, whether as a result of new information,
future events, or otherwise. You are advised, however, to
consult any further disclosures Boston Edison makes in its
filings to the SEC. Also note that Boston Edison provides in the
above paragraphs a cautionary discussion of risks and other
uncertainties relative to its business. These are factors that
could cause its actual results to differ materially from expected
and historical performance. Other factors in addition to those
listed here could also adversely affect Boston Edison.
Amortization of Merger Related Costs
The merger creating NSTAR was accounted for under the purchase
method of accounting and resulted in the recognition of an
acquisition premium (goodwill). An integral part of the merger
is the rate plan of the combined retail utility subsidiaries that
was approved by the Massachusetts Department of
Telecommunications and Energy (MDTE) in July 1999. Significant
elements of the rate plan include a four-year distribution rate
freeze through August 2003, recovery of the acquisition premium
(goodwill) of approximately $490 million over 40 years resulting
in annual amortization of approximately $12.2 million, and
recovery of filed costs to achieve (CTA) of $111 million over 10
years. CTA are the costs incurred to execute the merger
including the employee costs for a voluntary severance program,
costs of financial advisers, legal costs, and other transaction
and systems integration costs. Boston Edison expects to be
required by the Massachusetts Department of Telecommunications
and Energy (MDTE) to reconcile the actual CTA costs incurred with
the original estimate. This reconciliation will include a final
accounting of the deductibility for income tax purposes of each
component of CTA. The total actual consolidated NSTAR CTA is
approximately $143 million, with the majority of these costs to
be allocated to Boston Edison. This increase from the original
estimate is partially mitigated by the fact that the portion of
CTA that is not deductible for income tax purposes is
approximately $20 million lower than the original estimate. The
CTA and goodwill amounts were filed and approved as part of the
rate plan. The annual allocation of CTA amortization expense to
the Company is approximately $7.2 million.
As disclosed in Boston Edison's Form 10-K for the year ended
December 31, 2001, NSTAR expected that it would transfer $319
million of goodwill to its reporting unit, as a component of
Boston Edison's common equity, effective January 1, 2002.
However, upon further review and consideration of all the
transition provisions of the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), NSTAR
has determined it will continue to account for goodwill by the
acquired entities as it has done since the date of the merger.
For regulatory purposes, Boston Edison has been allocated $319
million of goodwill and is expensing this amount over 40 years.
This amount is being recovered from Boston Edison's customers and
will continue to be treated as an intercompany charge among the
Company and its affiliated companies, ComElectric, Cambridge
Electric and NSTAR Gas. The annual allocation of goodwill
amortization expense to the Company is approximately $8 million.
Critical Accounting Policies
The accompanying consolidated financial statements for each
period presented include the activities of Boston Edison's wholly
owned subsidiaries. All significant intercompany transactions
have been eliminated. Certain reclassifications have been made
to the prior year data to conform to the current presentation.
a. Regulatory - Accounting
Boston Edison follows accounting policies prescribed by the FERC
and the MDTE. In addition, Boston Edison is subject to the
accounting and reporting requirements of the SEC. The
accompanying condensed consolidated financial statements conform
to generally accepted accounting principles (GAAP). As a rate-
regulated company, Boston Edison is subject to the Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). The application of
SFAS 71 results in differences in the timing of recognition of
certain expenses from that of other businesses and industries.
The energy delivery business remains subject to rate-regulation
and continues to meet the criteria for application of SFAS 71.
This rate-making process results in the recording of regulatory
assets based on current and future cash inflows. As of September
30, 2002 and December 31, 2001, Boston Edison has recorded
regulatory assets of $951 million and $769 million, respectively.
Boston Edison continuously reviews these assets to assess its
ultimate recoverability within the approved regulatory
guidelines. Boston Edison anticipates to fully recover in its
rates these regulatory assets. However, impairment risk
associated with these assets relates to potentially adverse
legislative, judicial or regulatory actions in the future. Plant
and other regulatory assets related to the generation business
are recovered through the transition charge.
Boston Edison has long-term purchased power agreements that are
used primarily to meet its standard offer obligation. The
majority of these agreements are above-market and are not
reflected on the accompanying Condensed Consolidated Balance
Sheets. However, effective April 1, 2002, Boston Edison has
marked to market one purchased power contract that is reflective
of above-market costs. The above-market value of this contract
is reflected as a component of power contracts on the
accompanying Condensed Consolidated Balance Sheets. Refer to
"Critical Accounting Policies," Item d. "Derivative Instruments"
below for a further discussion. The above-market costs of all
these contracts are currently being recovered through the
transition charge as these costs are incurred. This recovery
occurs through 2016. This recovery period coincides with the
contractual terms of these purchased power agreements.
Furthermore, standard offer and default service revenues are
adjusted periodically to recover actual costs provided. Standard
offer and default service revenues are recognized based on these
approved rates for energy delivery. Refer to "Retail Electric
Rates" in this MD&A for a further discussion.
b. Pension and Other Postretirement Benefits
Boston Edison is the sponsor of NSTAR's Pension Plan (the Plan).
As its sponsor, Boston Edison allocates the costs of the Plan
among itself and the other NSTAR subsidiary companies based on a
percentage of total direct labor charged to the Company.
The Company's pension and other postretirement costs are
dependent upon several factors and assumptions, such as the
discount rate, the long-term rate of return of plan assets and
health care trends.
The Company's plan assets have been affected by significant
declines in the equity markets in the past three years. These
conditions are expected to impact the funded status of the Plan
at year-end and pension and postretirement costs for 2003. Based
on current estimates, the Company anticipates recognizing pension
and other postretirement costs for 2003 of $25 million to $55
million above the 2002 level of $37 million. These costs would
result in approximately $20 million to $40 million of incremental
net pension and other postretirement expenses charged to expense
in 2003. Boston Edison will record approximately 60% of the
pension and other postretirement costs.
As a result of the negative investment performance, it is
probable that at December 31, 2002 the accumulated benefit
obligation will exceed Plan assets. Therefore, it is also
probable that the Company will be required to recognize an
additional minimum liability as prescribed by the Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 87, "Employers' Accounting for
Pensions" (SFAS 87) and SFAS No. 132, "Employers' Disclosures
about Pensions and Postretirement Benefits." The additional
minimum liability would result in the removal of Prepaid pension
cost from Boston Edison's Consolidated Balance Sheet.
The Company's prepaid pension balance was $238 million as of
September 30, 2002. The liability and Prepaid pension adjustment
would be recorded as a non-cash charge to Other Comprehensive
Income (OCI), and would not affect the results of operations for
2002. The charge to OCI would be reversed in future periods at
the time that the fair value of the trust assts exceeds the
accumulated benefit obligation. Assuming there is no significant
change in interest rates or equity market performance for the
remainder of the year, the Company anticipates that the after-tax
charge to OCI will be approximately $200 million to $300 million.
The ultimate impact of the Plan's investment performance on the
Company's financial position, results of operations and cash
flows will not be known until the Plan's assets and liabilities
are valued at December 31, 2002.
The Plan currently meets the minimum funding requirements of the
Employment Retirement Income Security Act of 1974. However,
management is currently evaluating the extent to which it may
make additional optional cash contributions to the Plan, the
timing of each contribution and the impact on the additional
minimum liability. Should management elect to increase the level
of its cash contributions to the Plan, such cash requirements
could be material to its cash flows. Management believes it has
adequate access to capital resources to support these
contributions. Pension and other postretirement costs and cash
contributions beyond 2003 are largely dependent on the financial
markets.
In addition, the Company anticipates filing a request with the
MDTE seeking an order to mitigate the non-cash charge to OCI and
the increases in expected pension and other postretirement
benefit costs and cash contributions. If approved, this request
could potentially allow the Company to record a regulatory asset
in lieu of a charge to OCI. The Company cannot determine whether
the request to the MDTE will be approved or whether the approval
would be sufficient to record a regulatory asset under SFAS 71.
c. New Accounting Standards
On July 5, 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143). This Statement, which
is effective for NSTAR on January 1, 2003, establishes accounting
and reporting standards for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations
of lessees. SFAS 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the
carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a
gain or loss upon settlement. Management is currently assessing
the impact of SFAS 143 in light of its regulatory and accounting
requirements. Management has identified several minor long-lived
assets, including lease arrangements, and has determined that it
is legally responsible to remove such property and comply with
the requirement of this standard. However, based on the
company's assessment of its potential liability and rate
regulatory treatment for certain identified assets, the adoption
of SFAS 143 had no effect on its results of operations,
cash flows, or financial position.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets" (SFAS 144), was effective January 1, 2002, and
addresses accounting and reporting for the impairment or disposal
of long-lived assets. SFAS 144, among other things, expands the
reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The
implementation of SFAS 144 had no effect on the Company's results
of operations or financial position.
The FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146) that requires
entities to record a liability for costs related to exit or
disposal activities when the costs are incurred. Previous
accounting guidance required the liability to be recorded at the
date of commitment to an exit or disposal plan. NSTAR is
required to comply with SFAS 146 beginning January 1, 2003.
NSTAR anticipates that the implementation of this standard will
not have an adverse impact on its financial position or results
of operations.
As of January 1, 2001, Boston Edison adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities",
as amended by SFAS Nos. 137 and 138, (collectively, SFAS 133).
SFAS 133 established accounting and reporting standards requiring
every derivative instrument (including certain derivative
instruments embedded in such contracts as fixed-price fuel supply
and power contracts) be recorded on the Consolidated Balance
Sheets as either an asset or liability measured at its fair
value. Previously, all of the company's commodity purchased power
contracts were exempt from this accounting treatment under the
normal purchase and sales exception of SFAS 133. As a result,
these contracts were not marked to market and have not been
reflected on the accompanying Condensed Consolidated Balance
Sheets.
The impact of SFAS 133 is discussed in the following paragraph.
d. Derivative Instruments
Boston Edison adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), effective January
1, 2001. The accounting for derivative financial instruments is
subject to change based on the guidance received from the
Derivative Implementation Group (DIG) of FASB. The DIG issued
C15, on October 10, 2001, which specifically addressed the
interpretation of clearly and closely related contracts that
qualify for the normal purchase and sales exception under SFAS
133. The conclusion reached by the DIG was that contracts with a
pricing mechanism that is subject to future adjustment based on a
generic index that is not specifically related to the contracted
service commodity, generally would not qualify for the normal
purchase and sales exception.
On April 1, 2002, the effective date of DIG C15, Boston Edison
adopted the interpretation of this guidance and began marking to
market certain of its long-term purchased power contracts that
previously qualified for the normal purchase and sale exception.
Boston Edison has one purchased power contract that contains
components with pricing mechanisms that are based on a generic
index, such as the GNP or CPI and are applied to in significant
factors of these agreements. Therefore, as required by the
interpretation of C15, Boston Edison has recorded this contract
at fair value on its accompanying Condensed Consolidated Balance
Sheets beginning in the second quarter of 2002. This action
resulted in the recognition of a liability for the fair value of
the above-market portion of this contract as of September 30,
2002 of approximately $266 million and is a component of Power
contracts on the accompanying Condensed Consolidated Balance
Sheets. Boston Edison has recorded a corresponding regulatory
asset to reflect the future recovery of the above-market
component of this contract through its transition charge.
Therefore, as a result of this regulatory treatment, the
recording of this contract on its accompanying Condensed
Consolidated Balance Sheets does not result in an earnings
impact.
Boston Edison has other purchased power contracts in which the
fair value is significantly above-market. However, these
contracts have met the criteria for normal purchase and sales
exception pursuant to SFAB 133 and C15 and have not been recorded
on the accompanying Condensed Consolidated Balance Sheets. The
above market portion of this contract is currently being
recovered through the transition charge.
Boston Edison will continue to monitor any further guidance that
may result from FASB revisions and clarifications to SFAS 133.
Based on Boston Edison's assessment to date, the adoption of SFAS
133 has not had a material effect on its results of operations,
cash flows, or net assets.
e. Revenue Recognition
Boston Edison's revenues are based on authorized rates approved
by the FERC and the MDTE and are recorded as energy services are
delivered. Estimates of transmission, distribution and
transition revenues for electricity delivered to customers but
not yet billed are accrued at the end of each accounting period.
Included as a component of transition revenue is the recovery of
all above-market purchased power costs. The determination of
unbilled revenues requires management to estimate the volume and
pricing of electricity delivered to customers prior to actual
meter readings.
In determining its unbilled electric based revenues, Boston
Edison compares the actual delivery of megawatthours (mWh)
demanded (its territory load) to its actual monthly billed mWh
sales. The difference in volume represents the level of unbilled
mWhs. Dollars associated with the unbilled mWhs are calculated
by multiplying these units by Boston Edison's approved
distribution revenue rates. There is no inherent volatility in
the rate used to determine unbilled revenue. Using this
estimation methodology, there is minimal volatility in estimating
this component of operating revenues.
f. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make judgements, estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Certain of these accounting
principles require subjective and complex judgements used in the
preparation of financial statements. Accordingly, a different
financial presentation could result depending on the judgement,
estimates or assumptions that are used. Such estimates and
assumptions, include, but are not specifically limited to:
depreciation rates set by regulator, amortization terms, future
interest rates, future discount rates, mark-to-market valuations,
investments returns, impact of new accounting standards, future
costs associated with long-term contractual obligations, future
compliance costs associated with environmental regulations and
continuing creditworthiness of third parties. Actual results
could materially differ from those estimates.
Rate and Regulatory Proceedings
The 1999 MDTE order, which approved the rate plan associated with
the merger of BEC and COM/Energy, was appealed by certain parties
to the Massachusetts Supreme Judicial Court (SJC). In October
2001, the MDTE certified the record of the case to the SJC. The
appeals of the Massachusetts Attorney General (AG) and a separate
group that consists of The Energy Consortium (TEC) and Harvard
University (Harvard) are pending. On June 21, 2002, TEC and
Harvard filed their joint initial brief with the SJC and on June
24, 2002, the AG filed a brief in the consolidated proceeding.
TEC and Harvard allege that, in approving the rate plan and
merger proposal, the MDTE committed errors of law in the
following areas: (1) in adopting a public interest standard, the
MDTE applied the wrong standard of review, and failed to
investigate the propriety of rates and to determine that the
resulting rates of Boston Edison, Cambridge Electric, ComElectric
and NSTAR Gas were just and reasonable; (2) that in permitting
Cambridge Electric and ComElectric to adjust their rates by $49.8
million to reflect demand-side management costs, the MDTE failed
to determine whether such an adjustment was warranted in light of
other cost decreases; (3) that the MDTE's approval results in an
arbitrary and unjustified sharing of benefits and costs between
ratepayers and shareholders; and (4) that the MDTE's approval of
the rate plan guarantees shareholders recovery of future costs
without any future demonstration of customer savings. The AG's
brief includes similar arguments in each of these areas and adds
that, in allowing recovery of the acquisition premium, the MDTE
has improperly deviated from a cost basis in setting approved
rates and the ratemaking policies in other jurisdictions.
Responsive briefs from NSTAR and the MDTE were filed on August
30, 2002 and September 9, 2002, respectively. Reply briefs were
filed by TEC/Harvard and the AG on September 27, 2002 and October
3, 2002, respectively. On November 4, 2002, oral arguments
occurred before the SJC. Management is currently unable to
determine the outcome of this proceeding. Boston Edison intends
to vigorously defend its position relative to this appeal.
However, if an unfavorable outcome were to occur, there could be
a material adverse impact on business operations, the
consolidated financial position, cash flows and the results of
operations for the reporting period in which the unfavorable
outcome occurs.
Service Quality Plans
On October 29, 2001, and as subsequently updated, NSTAR Electric
filed proposed service quality plans for each company with the
MDTE, which included guidelines that had been established by the
MDTE as a result of its generic investigation of service quality
issues. The service quality plans established performance
benchmarks effective January 1, 2002 for certain identified
measures of service quality relating to customer service and
billing performance, customer satisfaction, and reliability and
safety performance. NSTAR Electric is required to report
annually concerning its performance as to each measure and is
subject to maximum penalties of up to two percent of transmission
and distribution revenues should performance fail to meetexceeded the applicable benchmarks. NSTAR Electric also filed with the MDTE a
report concerning its performance on the identified service
quality measures for the two twelve-month periods ended August
31, 2000 and 2001. This report included a calculation of
penalties in accordance with MDTE guidelines as if such
guidelines were in effect during the period. On March 22, 2002,
following hearings on the matter, the MDTE issued an order
imposing a service quality penalty of approximately $3.25 million
on NSTAR Electric of which $3.2 million related specifically to
Boston Edison that was refunded to customers as a credit to their
bills during the month of May 2002. As a result of the accrual
for this estimated penalty during 2001, this refund had no effect
on Boston Edison's consolidated financial position or results of
operations in 2002.
Through September 30, 2002 Boston Edison Electric's performance
has resulted in a minimal penalty situation based on both actual
results through September 2002 and forecasted results for the
remaining three-month period. However,established benchmarks; however, these
results may not be indicative of the results that may be expected
for the remainder of the year. Boston
Edison accounts for its service quality penalties pursuant to
SFAS No. 5, "Accounting for Contingencies." Accordingly, these
penalties are monitored on a monthly basis to determine Boston
Edison's contingent liability, and if Boston Edison determines it
is probable that a liability has been incurred and is estimable,
Boston Edison would then accrue an appropriate liability.
Annually, each NSTAR Electric Company,year, including Boston Edison,
makes a service quality performance filing with the MDTE. Any
settlement or rate order that would result in a different
liability (or credit) level from what has been accrued would be
adjusted inpeak-demand period
anticipated during the period an agreement is received from the MDTE.summer period.
c. Retail Electric Rates
The 1997 Restructuring Act requires electric distribution companies to obtain and resell power to
retail customers through either standard offer service or default
service for those who choose not to buy energy from a competitive
energy supplier
through either standard offer service or default service.supplier. Standard offer service will be available to
eligible customers through February 2005 at prices approved by
the MDTE, set at levels so as to guarantee mandatory overall rate
reductions provided by the Restructuring Act. New retail
customers in the Boston Edison service territoriesterritory and other
customers who are no longer eligible for standard offer service
and have not chosen to receive service from a competitive
supplier are provided default service. The price of default
service is intended to reflect the average competitive market
price for power. As of September 30,
2002March 31, 2003 and December 31, 2001,2002,
customers of Boston Edison had approximately 27%19% and 19%28%,
respectively, of itstheir load requirements provided by competitive
suppliers. As of December 31, 2000, Boston Edison's accumulated costThe decline in customers served by competitive
suppliers declined due to provide default and standard offer service waschanges in excess of the
revenues it was allowed to bill by approximately $193.6 million.market pricing.
On January 1 and July 1, 2001,April 24, 2003, Boston Edison was permitted byreceived approval from the MDTE
to increase its rates to customers for standard offer and
default service to collect this shortfall. Furthermore, when
combined with the reduction in energy supply costs experienced in
2001 and through the first halfinclude a Standard Offer Service Fuel Adjustment of 2002, rates were reduced on
January 1, 2002, April 1, 2002 and July 1, 2002.
In December 2000, the MDTE approved a standard offer fuel index
of 1.3210.902
cents per kilowatt-hour (kWh) that waswill be added to each
NSTAR Electric company'sBoston
Edison's standard offer service rates forrate effective May 1, 2003. The
higher rate is necessary due to the first half of 2001. In June 2001, the MDTE approved an
additional increase of 1.23 cents per kWh effective July 1, 2001
based on a fuel adjustment formula contained in its standard
offer tariffs to reflect the prices of natural
gas and oil. In
December 2001, the MDTE approved a decrease in this fuel index of
1.125 cents to 1.426 cents per kWh for the first quarter of 2002
based on a decrease in the cost of fuel. Effective April 1,
2002, each NSTAR Electric Company's fuel index was set to zero.
The MDTE has ruled that these fuel index adjustments are excluded
from the 15% rate reduction requirement under the Restructuring
Act.
In December 2001, NSTAR filed proposed transition rate
adjustments for 2002, including a preliminary reconciliation of
costs and revenues through 2001. The MDTE subsequently approved
tariffs for each retail electric subsidiary effective January 1,
2002. The filings were updated in February 2002 to include final
costs for 2001. The MDTE approved the reconciliation of costs
and revenues for Boston Edison through 2000 in its approval on
November 16, 2001 of a Settlement Agreement between Boston Edison
and the Massachusetts Attorney General resolving all outstanding
issues in Boston Edison's prior reconciliation filings. As a
part of this settlement, Boston Edison agreed to reduce the costs
sought to be collected through the transition charge by
approximately $2.9 million as compared to the amounts that were
originally sought. This settlement did not have a material
adverse effect on Boston Edison's consolidated financial
position, results of operations or cash flows.
Other Legal Matters
In the normal course of its business, Boston Edison and its
subsidiaries are also involved in certain legal matters, including
civil lawsuits.litigation. Management is unable to fully determine a
range of reasonably possible court-ordered damages, settlement
amounts, and related litigation costs ("legal liabilities") that
would be in excess of amounts accrued. Based on the information
currently available, the CompanyBoston Edison does not believe that it is
probable that any such additional costslegal liability will have a
material impact on its consolidated financial position. However,
it is reasonably possible that additional legal liabilities costs that
may result from changes in estimates could have a material impact
on its results of operations for a reporting period.
Results of Operations - Three Months Ended September 30, 2002March 31, 2003 vs.
Three Months Ended September 30, 2001March 31, 2002
The following section of MD&A compares the results of operations
for each of the three monthsquarters ended September 30,March 31, 2003 and 2002, and 2001,
respectively, and should be read in conjunction with the
condensed consolidated financial statements and the accompanying
notes included elsewhere in this report.
Net income was $71.5$19.0 million for the three months ended September
30, 2002March 31,
2003 compared to $82.3$16.9 million for the same period in 2001, a
14% decrease.2002, an
increase of 12%.
The results of operations for the three-month periodquarter are not indicative of
the results thatwhich may be expected for the entire year due to the
seasonality of kilowatt-hour (kWh) sales and revenues. Refer to
the accompanying Note BA to the accompanying Unaudited Condensed Consolidated Financial
Statements.
The following is a summary of retail electric energy sales for
the periods indicated:
Three Months Ended March 31,
2003 2002 % Change
Retail Electric Sales -
MWH
Residential 1,178,996 1,022,236 15.3
Commercial 2,305,117 2,127,890 8.3
Industrial 304,205 328,449 (7.4)
Other 40,648 41,274 (1.5)
Total retail sales 3,828,966 3,519,849 8.8
========= =========
Weather conditions greatly impact the change in electric revenues
in Boston Edison's service area. The first quarter period of
2003 was significantly colder than the same period in 2002.
Below is comparative information on heating degree days for the
three-month periods ending March 31, 2003 and 2002 and the number
of degree days in a "normal" first quarter period as represented
by a 30-year average.
Normal
30-Year
2003 2002 Average
Heating degree days 3,181 2,429 2,870
Percentage change from prior year 31.0% (16.8)%
Percentage change from 30-year average 10.8% (15.3)%
Operating revenues
Operating revenues decreased $153.8 million or 25% for the three-
month period ended September 30, 2002 as compared tofirst three months of 2003 decreased
8.8% from the same period in 20012002, primarily resulting from
decreases in electric rates. The major revenue components were
as follows:
(in thousands)
Retail electric revenues $ (143,794)(28,405)
Wholesale revenues (5,560)(9,585)
Other revenues (4,457)1,975
Decrease in operating revenues $ (153,811)(36,015)
==========
Retail revenues were $344.9 million in 2003 compared to $373.3
million in 2002, a decrease of $28.4 million, or 8%. The mostdecline
in retail revenues reflects the significant factor contributing to this decreasedecreases in operating revenues was the reduction inboth
standard offer and default service rates charged to customers.
Retail revenues were $432.4 millionoffset, in part, by the
third quarterimpact of 2002
compared to $576.2 millionan 8.8% increase in the same period of 2001, a decrease
of $143.8 million, or 25%. Lowerretail energy sales. The lower
rates implemented in January April and July 20022003 for standard offer and default
services accounted for a decreasedecreases in retail revenues of $72.1$41.6
million and $55.1$6.1 million, respectively. Transition revenues were
$13.4 million higher in the current quarter while distribution
revenues increased by
$19.7$6.9 million and transmission revenues
increased $2.6 million. The increases in each of these
components of revenue were due primarily to the securitization true-up
adjustment, as noted below, and to higher rates for transition
cost recovery offset by a $2.2 million declineincrease in
earned
mitigation incentive revenues that were allowed for successfully
lowering transition charges. Transmission revenues increased by
$1.7 million partially due to the Company's recently completed
true-up filing.retail energy sales. The change in retail revenues related to
standard offer and default services are fully reconciled to the
costs incurred and have no impact on net income.
On October 7, 2002, Boston EdisonAs shown in the table above, the 8.8% increase in the current
quarter's retail MWH sales primarily reflects higher sales in the
residential and the AG (Settling Parties),
submitted for approval by the MDTE a Joint Motion for Approval of
Settlement Agreement and a Settlement Agreement resolving issues
incommercial sectors. Boston Edison's reconciliationsales to
residential and commercial customers were approximately 31% and
60%, respectively, of costs and revenuesits total retail sales mix for the year 2001. Among other issues,current
quarter and provided nearly all of its distribution revenue. The
7.4% decline in industrial sector sales reflects the Settlement Agreement includes
an adjustment relating to the true-upcontinued
slowdown in economic conditions that resulted from reduced
production or facility closings. The industrial sector comprises
approximately 8% of costs relating to
securitization. As a result of this Settlement Agreement with
the AG and an opinion from NSTAR's regulatory counsel, Boston Edison recognized approximately $11.4Edison's energy sales.
Wholesale revenues were $7.6 million in transition
charge revenues. This benefit was significantly offset by other
regulatory true-up adjustments. Management anticipates final
approval by the MDTE in the fourth quarter. However, should the
MDTE issued a final adverse decision, it could have a material
impact on its results of operations for a particular reporting
period.
Warmer weather conditions that were 34% above normal for the
third quarter of 2002 impacted the margin for electric sales.
Below is comparative information on cooling degree days for the
three-month periods ending September 30, 2002 and 2001 and the
number of degree days in a "normal" third quarter period as
represented by a 30-year average. A "cooling degree-day" is a
unit measuring how much the outdoor mean temperature rises above
a base of 65 degrees. Each degree below or above the base, is
measured in one degree day.
Normal
30-Year
Average
2002 2001
Cooling degree days 792 526 593
Percentage change from prior year 50.6% 26.1%
Percentage change from 30-year average 33.6% (11.3)%
Wholesale electric revenues were $12.42003 compared to $17.2
million in the third
quarter of 2002, compared to $17.9 million in the same period of
2001, a decrease of $5.5$9.6 million, or 31%56%. This
decrease in wholesale revenues primarily reflects decreaseda decrease in kWh sales
of 35.14%62% due to the expiration of twothree municipal power supply contracts on May 31, 2002 and a decline in rates.during
2002. Amounts collected from wholesale customers have no impact
on results of operations.net income.
Other revenues were $23.7$21.5 million in the thirdfirst quarter of 20022003
compared to $28.2$19.5 million in the same period of 2001,2002, an decreaseincrease
of $4.5$2 million, or 16%10%. The decreaseThis increase primarily reflects the absence in
2002 of a $4.2 million FERC-approved settlement withhigher
transmission contract customers.revenues.
Operating expenses
PurchasedDespite higher retail unit sales of 8.8%, purchased power costs
were $199.4$189.8 million in the thirdfirst quarter of 20022003 compared to
$343.5$232.6 million in the same period of 2001,2002, a decrease of $144$42.8
million, or 42%18%. The decrease in expense reflects a 31%the decrease
in wholesale sales and lower costs that
reflect the prices offor natural gas and oil. The
net changedecrease in expense also includes the current quarter also reflectsrecognition of $28.4
million relating to the impact of the
under-recovery ofdeferred standard offer and default
service supply costs of $27.1 million as a credit to expense as compared to
an over-recoveryfor current period under-collection of these
costs of a $67.1 million change
in the same period last year.costs. Boston Edison adjusts its electric rates to collect the
costs related to energy supply from customers on a fully
reconciling basis. Due to the rate adjustment mechanisms,
changes in the amount of energy supply expense have no impact on
earnings.
Operations and maintenance expense was $56.4$53.4 million in 2003
compared to $53.7 million in 2002, compared to $50.4 million in 2001, an increasea decrease of $6.0$0.3 million, or
12%less than 1%. This increasedecrease reflects anreduced maintenance expense
of $3.7 million due primarily to improvements made in electric
distribution services in 2002. This decrease was offset by
increases in benefits costs of $1.5 million and customer service
of $1.6 million, the latter reflecting the increase in pension costs as
well as increases in other benefit costs due to a downturn in the
equity markets, lower interest costs and health care costs.
These increases were partially offset by reduced labor costs and
the absence of storm related costs during 2002 resulting from
milder weather conditions.retail
sales.
Depreciation and amortization expense was $43.1$42.9 million in 2003
compared to $42.8 million in 2002, compared to $42.5 million in 2001, an increase of $0.6$0.1 million,
or less than 1%. The increase reflects a slightly higher level
of depreciable plant in service.
Demand side management (DSM) and renewable energy programs
expense was $12.3$12 million in the thirdfirst quarter of 20022003 compared to
$13.7$11.2 million in the same period of 2001, a decrease2002, an increase of $1.4$0.8
million, or 11%, primarily due to the7%. The timing of DSM expense which is consistent with the
collection of conservation and renewable energy revenues. These
costs are collected from customers on a fully reconciling basis
and therefore, fluctuations in program costs have no impact on
earnings, other than incentive amounts
earned by the company in return for increased customer
participation.earnings.
Property and other taxes were $17.1$18.2 million in 2002 compared to
$16.4 million in 2001, an increase of $0.7 million, or 5%. The
increase is due to higherboth 2003 and
2002. Higher overall municipal property taxes, particularly for
the City of Boston, were offset by lower payroll taxes relating to other communities.taxes.
Income taxes from operations were $47.5$12.8 million in 2003 compared
to $11.9 million in 2002, compared
to $53.0 million in 2001, a decreasean increase of $5.5$0.9 million, or 11%8%.
This decreaseincrease reflects lowerhigher pre-tax operating income in 2002.
Other income, net
Other income, net was $1.9 million in 2002 compared to other income,
net of $0.3 million in the same period of 2001, a net increase
in other income, net of $1.6 million, due primarily from income
earned in connection with the sale of certain property.2003.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $20.1$23.7 million in 2003, compared to $20.9 million
in 2002, compared to $22.0an increase of $2.8 million, or 13%. The increase
reflects the impact of the issuance of $500 million in 2001, a decrease of $1.9 million, or 9%. Approximately $1long-term
debt ($400 million of 4.875% 10-year debentures and $100 million
of 3-year floating rate debentures) in October 2002 partially
offset by the decrease is relatedabsence of $1.2 million in interest on the 8.25%
debentures that were retired in September 2002 and a $1.1 million
decline in interest on the securitization certificates due to securitization certificate
interest reflecting the
scheduled retirement of this debt.
The
remaining decrease relates to a decrease in interest on long-term
debt and is the result of the retirement of $24.3 million, 9.375%
debentures in August 2001.
Short-term debt and other interest charges were $3 million in
2002 compared to a net benefit of $0.5 million in 2001, an
increase of $3.5 million due to a reduction in regulatory
interest resulting from reductions in the under-collection of
regulatory deferrals offset by a significant decline in short-
term borrowing rates.
Results of Operations - Nine Months Ended September 30, 2002 vs.
Nine Months Ended September 30, 2001
Net income was $112.9 million for the nine months ended September
30, 2002 compared to $143 million for the same period in 2001, a
21% decrease.
The results of operations for the nine month period are not
indicative of the results which may be expected for the entire
year due to the seasonality of kWh sales and revenues. Refer to
Note B to the accompanying Condensed Consolidated Financial
Statements.
Operating revenues
Operating revenues decreased $299.6 million or 19% during the
nine months ended September 30, 2002 as follows:
(in thousands)
Retail electric revenues $ (285,759)
Wholesale revenues (15,476)
Other revenues 1,623
Decrease in operating revenues $ (299,612)
==========
Retail revenues were $1,158.9 million in 2002 compared to
$1,444.6 million in 2000, a decrease of $285.7 million, or 20%.
The change in retail revenues includes lower rates implemented in
January, April and July 2002 for standard offer and default
service and a 0.3% decrease in retail kilowatt-hour (kWh)
electric sales. Transition revenues increased by
$29.3 million due primarily to the securitization true-up
adjustment, as noted below, and to higher rates for transition
cost recovery offset by a $6.3 million decline in earned
mitigation incentive revenues that were allowed for successfully
lowering transition charges. Boston Edison will continue to earn
mitigation incentive revenue as it lowers its transition charge
through 2009. The revenues related to standard offer and default
services are fully reconciled to the costs incurred and have no
impact on net income.
Wholesale electric revenues were $44.8 million in 2002 compared
to $60.3 million in 2001, a decrease of $15.5 million, or 26%.
This decrease in wholesale revenues reflects decreased kWh sales
of 20.7%, primarily as the result of decreased demand resulting
from the expiration of two municipal contracts on May 31, 2002.
After October 31, 2005, the Company will no longer have contracts
for the supply of wholesale power. Amounts collected from
wholesale customers are credited to retail customers through the
transition charge. Therefore, the expiration of these contracts
has no impact on results of operations.
Other revenues were $62 million in 2002 compared to $60.4 million
in 2001, an increase of $1.6 million, or 3%. The increase
reflects higher Regional Network Services transmission revenues.
Operating expenses
Purchased power costs were $625.9 million in 2002 compared to
$900.5 million in 2001, a decrease of $274.6 million, or 31%.
The decrease reflects lower purchased power requirements due to a
0.3% decrease in retail sales, a 26% decrease in wholesale sales
and lower costs that reflect the lower prices of natural gas and
oil. The net change in the current nine-month period also reflects
the impact of the under-recovery of standard offer and default
service supply costs of $9.4 million as a credit to expense as
compared to an over-recovery of these costs of a $152.3 million
change in the same period last year. Boston Edison adjusts its
electric rates to collect the costs related to energy supply
from customers on a fully reconciling basis. Due to the rate
adjustment mechanisms, changes in the amount of energy supply
expense have no impact on earnings.
Operations and maintenance expense was $169.1 million in 2002
compared to $143.9 million in 2001, an increase of $25.2 million,
or 18%. This increase primarily reflects non-recurring
corrective electric systems maintenance costs and increased
pension related benefit costs of $13.2 million.
Depreciation and amortization expense was $128.9 million in 2002
compared to $126.4 million in 2001, an increase of $2.5 million,
or 2%. The increase reflects higher level of depreciable plant
in service.
Demand side management (DSM) and renewable energy programs
expense was $34.4 million in 2002 compared to $40.8 million in
2001, a decrease of $6.4 million, or 16% primarily due to the
timing of DSM expense which is consistent with the collection of
conservation and renewable energy revenues. These costs are
collected from customers on a fully reconciling basis and
therefore, fluctuations in program costs have no impact on
earnings, other than incentive amounts earned by the company in
return for increased customer participation.
Property and other taxes were $52.8 million in 2002 compared to
$51.3 million in 2001, an increase of $1.5 million, or 3% due to
higher municipal property taxes for the City of Boston of $3.5
million offset by a decrease in rates of approximately $1.7
million in municipal property taxes in the Company's service
area, excluding the City of Boston.
Income taxes from operations were $76.0 million in 2002 compared
to $92.9 million in 2001, an decrease of $16.9 million, or 18.2%.
This decrease reflects lower pretax operating income in 2002.
Other income, net
Other income, net was $2.8 million in 2002 compared to income of
$3.6 million in the same period of 2001, a net decrease in other
income, net of $0.8 million. The decrease was primarily due to
the absence in 2002 of the sale of equity securities in
connection with the demutualization of John Hancock and MetLife.
Interest charges
Interest on long-term debt and transition property securitization
certificates was $61.5 million in 2002 compared to $66.8 million
in 2001, a decrease of $5.3 million, or 8%. Approximately $3.2
million of the decrease is related to securitization certificate
interest reflecting the scheduled retirement of this debt. The
decrease in interest on long-term debt is primarily the result of
a reduction of approximately $1.7 million due to the retirement
of $24.3 million of 9.375% debentures during the third quarter of
2001.
Other interest charges were $7.5$2.5 million in 2002 compared to $5.3
million in 2001, an increaseboth 2003 and 2002.
The impact of $2.2 million. The increase
reflects a $6.5 million increase in the carrying charges due the
Company associated with reductions in the levelshort-term borrowing rates and levels
of under-
collected regulatory deferrals. The higher level of short-term borrowings were offset by a significantly lower rates resultingan increase in lower interest cost savings of $3.9 million.
Performance Assurances and Financial Guarantees
Boston Edison has entered into a series of purchased power
agreements to meet its default and standard offer service supply
obligations through December 31, 2002. These agreements are
generally for a term of six months to twelve months. The company
is currently negotiating with suppliers and anticipates having
purchased power agreements in place to service its Default
Service and Standard Offer obligation in 2003 under similar terms
as those in the past. Boston Edison currently is recovering
payments it is making to suppliers from its customers. Most of
the Boston Edison's power suppliers are subsidiaries of larger
companies with investment grade or better credit ratings. In
many cases, Boston Edison has financial assurances and guarantees
in place with the parent company of the supplier, to minimize
Boston Edison risk in the event the supplier encounters financial
difficulties or otherwise fails to perform. In addition, under
these agreements, in the event that the supplier (or its parent
guarantor) fails to maintain an investment grade credit rating,
it is required to provide additional security for performance.
Boston Edison's policy is to enter into power supply arrangements
only if the supplier (or its parent guarantor has an investment
grade or better credit rating. In view of current turmoil in the
energy supply industry, Boston Edison is unable to determine
whether its suppliers (or their parent guarantors) will become
subject to financial difficulties, or whether these financial
assurances and guarantees are sufficient. In such event, the
supplier (or its guarantor) may not be in a position to provide
the required additional security, and Boston Edison may then
terminate the agreement. Some of these agreements include a
reciprocal provision, where in the unlikely event that an Boston
Edison distribution company receives a credit rating below
investment grade, that company could be required to provide
additional security for performance, such as a letter of credit.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
There have been no material changes since year-end.regulatory interest.
Item 4. Controls and Procedures
Boston Edison's disclosure controls and procedures are designed
to ensure that information required to be disclosed in reports
that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities
and Exchange Commission.
Within 90 days prior to the date of filing this Quarterly Report
on Form 10-Q, Boston Edison carried out an evaluation, under the
supervision and with the participation of Boston Edison's
management, including Boston Edison's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of Boston Edison's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based on that evaluation,
the Chief Executive Officer and the Chief Financial Officer
concluded that Boston Edison's disclosure controls and procedures
are effective in(1) to timely alertingalert them to material information
relating to Boston Edison's information required to be disclosed
by Boston Edison in the reports that it files or submits under
the Securities Exchange Act of 1934. These reports are1934 (2) to ensure that
appropriate information is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
Subsequent to the date of that evaluation, there have been no
significant changes in Boston Edison's internal controls or in
other factors that could significantly affect internal controls,
nor were any corrective actions required with regard to
significant deficiencies and material weaknesses.
Part II - Other Information
Item 1. Legal Proceedings
In the normal course of its business, Boston Edison and its
subsidiaries are involved in certain legal matters, including
civil litigation. Management is unable to fully determine a
range of reasonably possible court-ordered damages, settlement
amounts, and related litigation costs ("legal liabilities") that
would be in excess of amounts accrued. Based on the information
currently available, Boston Edison does not believe that it is
probable that any such additional legal liability will have a
material impact on its consolidated financial position. However,
it is reasonably possible that additional legal liabilities that
may result from changes in estimates could have a material impact
on its results of operations for a reporting period.
Item 5. Other Information
The following additional information is furnished in connection
with the Registration Statements on Form S-3 of the Registrant
(File Nos. 33-57840 and 333-55890), filed with the Securities and
Exchange Commission on February 3, 1993 and February 20, 2001,
respectively.
for informational purposes.
Ratio of earnings to fixed charges and ratio of earnings to fixed
charges and preferred stock dividend requirements:
Twelve months ended September 30, 2002:March 31, 2003:
Ratio of earnings to fixed charges 2.602.95
Ratio of earnings to fixed charges and preferred
stock dividend requirements 2.542.87
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:Exhibits filed herewith or incorporated by reference (as indicated):
Exhibit 4 - Instruments definingDefining the rightsRights of security
holders, including indenturesSecurity
Holders, Including Indentures
4.1 Revolving Credit Agreement dated November 15,
2002 (filed herewith)
Management agrees to furnish to the SECSecurities
and Exchange Commission, upon request, a copy
of any agreementsagreement or instrumentsinstrument defining the
rights of holders of any long-term debt whose
authorization does not exceed 10% of total
assets
Exhibits filed herewith:
Exhibit 12 - Statement re Computation of ratio of earnings to
fixed chargesRatios
12.1 - Computation of ratioRatio of earningsEarnings to fixed chargesFixed
Charges for the twelve months
ended June 30, 2002Twelve Months Ended March 31,
2003 (filed herewith)
12.2 - Computation of ratioRatio of earningsEarnings to fixed chargesFixed
Charges and preferred stock
dividend requirementsPreferred Stock Dividend
Requirements for the twelve
months ended June 30, 2002Twelve Months Ended
March 31, 2003 (filed herewith)
Exhibit 99 - Additional exhibitsExhibits
99.1 - Report of Independent Accountants
99.2 - Certification Statement of Chief Executive
Officer of Boston Edison Company pursuant to
Section 906 of the Sarbanes
- OxleySarbanes-Oxley Act of 2002
99.3 -(filed herewith)
99.2 Certification Statement of Chief Financial
Officer of Boston Edison Company pursuant to
Section 906 of the Sarbanes-
OxleySarbanes-Oxley Act of 2002.2002
(filed herewith)
99.3 Report of Independent Accountants
b) NoReports on Form 8-K:
A report on Form 8-K was filed duringon January 3, 2003 following
the third quarterMDTE approval received on December 20, 2002 to allow the
Company to defer as a regulatory asset, an additional minimum
liability, and the difference between the level of 2002.pension and
postretirement benefits that is included in rates and the
amounts that would have been recorded under SFAS 87 and SFAS
106 in 2003.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
BOSTON EDISON COMPANY
(Registrant)
Date: November 14, 2002May 9, 2003 /s/ R.Robert J. WEAFER, JR.Weafer,Jr.
Robert J. Weafer, Jr.
Vice President,
Controller and Chief
Accounting Officer
Sarbanes - Oxley Section 302(a) CertificationsCertification
I, Thomas J. May, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boston
Edison;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of Boston Edison as of,
and for, the periods presented in this quarterly report;
4. Boston Edison's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for Boston Edison and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to Boston Edison,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Boston Edison's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report are our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. Boston Edison's other certifying officer and I have disclosed,
based on our most recent evaluation, to Boston Edison's
auditors and the audit committee of NSTAR's board of trustees:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Boston
Edison's ability to record, process, summarize and report
financial data and have identified for Boston Edison's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. Boston Edison's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002May 9, 2003 By: /s/ THOMAS J. MAY
Thomas J. MAY
Thomas J. May
Chairman, President and
Chief Executive Officer
May
Chairman, President and
Chief Executive Officer
Sarbanes - Oxley Section 302(a) Certification
I, James J. Judge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boston
Edison:Edison;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of Boston Edison as of,
and for, the periods presented in this quarterly report;
4. Boston Edison's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14)15d-14)
for Boston Edison and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to Boston Edison,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Boston Edison's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report are our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. Boston Edison's other certifying officer and I have disclosed,
based on our most recent evaluation, to Boston Edison's
auditors and the audit committee of NSTAR's board of trustees:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Boston
Edison's ability to record, process, summarize and report
financial data and have identified for Boston Edison's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in Boston Edison'sthe registrant's internal controls; and
6. Boston Edison's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
Date: November 14,2002May 9, 2003 By: /s/ JAMES J. JUDGE
James J. Judge
Senior Vice President, Treasurer
and Chief Financial Officer